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Growth and the effects of inflation

  • Jones, Larry E.
  • Manuelli, Rodolfo E.

In this paper, we analyze the effects of changes in monetary growth rates in the context of models of endogenous growth when the demand for money comes from a cash-in-advance constraint. We explore two alternative avenues through which the rate of inflation could affect the overall long-run rate of growth of the economy. The first of these is through nominal rigidities in the tax code. The particular rigidity that we examine is for depreciation allowances that are fixed in nominal terms. The second avenue that we examine is a distortion of the labor-leisure choice when a Lucas-style model of effective labor is used. In both cases, the welfare costs and growth effects of various monetary growth rules relative to a constant money supply are studied. It is found that both the welfare costs of inflation and its growth effects are quite small at low to moderate levels of inflation. However, at rates of inflation that are high by U.S. standards but not uncommon in developing countries, the magnitude of both the growth effects and the welfare costs of inflation depend on the specification of the model. If cash and credit goods are substitutes there are no growth effects and moderate welfare effects. If the two goods are complements there are sizable growth effects and large welfare effects.

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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 19 (1995)
Issue (Month): 8 (November)
Pages: 1405-1428

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Handle: RePEc:eee:dyncon:v:19:y:1995:i:8:p:1405-1428
Contact details of provider: Web page: http://www.elsevier.com/locate/jedc

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  1. Barro, Robert J., 1990. "Government Spending in a Simple Model of Endogeneous Growth," Scholarly Articles 3451296, Harvard University Department of Economics.
  2. Jones, Larry E & Manuelli, Rodolfo E, 1990. "A Convex Model of Equilibrium Growth: Theory and Policy Implications," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 1008-38, October.
  3. Roubini, Nouriel & Sala-i-Martin, Xavier, 1995. "A growth model of inflation, tax evasion, and financial repression," Journal of Monetary Economics, Elsevier, vol. 35(2), pages 275-301, April.
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  12. Rebelo, Sergio, 1991. "Long-Run Policy Analysis and Long-Run Growth," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 500-521, June.
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  17. Larry E. Jones & Rodolfo E. Manuelli, 1990. "Finite Lifetimes and Growth," NBER Working Papers 3469, National Bureau of Economic Research, Inc.
  18. Easterly, William R., 1989. "Policy distortions, size of government, and growth," Policy Research Working Paper Series 344, The World Bank.
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  20. Hartman, Richard, 1987. "Monetary Uncertainty and Investment in an Optimizing, Rational Expectations Model with Income Taxes and Government Debt," Econometrica, Econometric Society, vol. 55(1), pages 169-76, January.
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  23. Imrohoroglu, Ayse, 1992. "The welfare cost of inflation under imperfect insurance," Journal of Economic Dynamics and Control, Elsevier, vol. 16(1), pages 79-91, January.
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  27. De Gregorio, Jose, 1992. "Economic growth in Latin America," Journal of Development Economics, Elsevier, vol. 39(1), pages 59-84, July.
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